Canadian real estate is seen as bulletproof but more banks are warning that might not be the case. CIBC Capital Markets’ November forecast shows a steep climb to the overnight rate. They expect the Bank of Canada (BoC) to hike rates up to five times over the next two years. Separately, they warned there is a “risk” in buying in this current rate environment.

CIBC Sees The Bank Of Canada Hiking Rates 5x By 2023

The “Big Six” Canadian bank has forecast a steep climb for Canadian interest rates. They see the overnight rate hitting 1.50% by the end of 2023 after receiving 5 rate hikes. The first hike is forecast to happen in September 2022, a little later than other banks have forecast. It would be followed by one more hike at year-end, with the remaining three hikes in 2023. This would put the overnight rate at six times its current level.

Canadian Mortgage Rates Will Climb With The Overnight Rate

A steep climb for the overnight rate means a steep climb for mortgage rates. The last time the overnight rate hovered around 1.5% was August 2018 and it was 3.5% for a 5-year fixed-rate mortgage. That’s about 50% higher than they currently sit.

Mortgage rates rising to this level would mean more than just paying more at renewal. A climb to that level would reduce buying power by roughly 15% compared to today. Affordability is the concern presented, but this is a bigger issue for liquidity. Resale prices are determined by how much people can pay. Reduced liquidity would mean prices need to adjust to a more liquid level. It was a similar increase in liquidity that helped boost prices during the pandemic.

Bank Warns There Is “Risk” In Buying Canadian Real Estate Today

Separately, CIBC deputy chief economist Benjamin Tal warns this isn’t an ideal time to buy a house. “I think there is a risk of getting into the market at today’s rates,” he said in an interview with Bloomberg.

“We are still dealing with emergency interest rates. Let’s remember that these are not normal interest rates and eventually they will rise,” he added.

The economist suggests buyers look for more manageable-sized properties at this time. Stretching yourself against rising rates is more of a gamble than doing so when they’re falling. A falling rate environment is what we’ve become accustomed to over the pandemic.

The bank’s sentiment is consistent with statements from other Canadian banks these days. BMO made a similar warning, saying debt will be cheap for a long time — just not this cheap. Scotiabank makes five rate hikes sound conservative, forecasting eight over the same period. Five or eight, it’s all a guess. An educated guess, but a guess nonetheless.

The principal takeaway here is that rates are expected to climb significantly. Mortgage rates are at an emergency level with quantitative ease (QE) driving them lower than the overnight rate would support. As the economy recovers, these supports will be eased, and rates will normalize. That’s great news for the economy, but less clear what it means for home prices.

CIBC : There is “Risk” in Buying Canadian Real Estate Today, BoC to Hike Rates 5x by Daniel Wong | Better Dwelling